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What's the Deal with Binary Options?

By Edited Apr 26, 2015 0 0

What are binary options trades all about?

Binary options are a relatively new form of trading that have been met with both a large amount of interest and criticism.  There are many individuals who don't think much of this type of trading, and many in the financial world agree while on the other side of things there are many traders who have jumped in and believe that binary options can be a part of a healthy overall trading portfolio.  This is a topic that just bringing it up is going to cause arguments among different investors depending on what side of this issue they fall on.

What are binary options?

The first step to choosing your side is knowing what exactly binary options are.  This type of trading is most commonly associated with the Forex market, although that is not always the case.   Binary options are an all or nothing position, hence the "binary" since there are only two choices.  An example of a binary option would be to show a position that USD/GBP is at 1.35.  You predict two days from now it will be above that number.  If this is considered by the market to be even odds, then you pay $50 for a position that pays $100 if you are right - but you lose the entire $50 if you are wrong.

This is why binary options has sometimes been referred to as gambling or "betting."  The all or nothing aspect gives a little bit of a rush, but that is also part of the reason that some investors and traders criticize binaries as well.  Generally speaking when you look at binary options you are looking at a set standard, usually of $100.  However the amount to buy into position will vary based on the general perception of the market.  For example, if 90% of the market thought that the USD was going to go up in the next three days, it might take $80 or $90 to buy in on that $100 binary.  However if you predicted against everyone else that the USD would fall in the next three days, it would only cost $10 or $20 to get a shot at that same $100.

Binary options are short term and none can last longer than a week, meaning the ability to see a short term trend is important.  This means if you're great at seeing overall patterns three or four days at a time, this will help you over the conventional Forex market which is often too volatile to consistently be worthwhile for more fundamental based traders.

Why is the forex market so popular with binaries?

One of the reasons the Forex matches so naturally is because it is a constantly moving market with prices between currency pairs often moving slightly every few seconds.  However many traders find that the leverage and sheer volatility of the currency market makes it extremely difficult to trade.  Traders who are especially good at seeing developing patterns or trends but don't have the patience or timing that allow for short trading love the ability to trade based on projections without worrying that an intra-day spike will wipe them out.

This set up with binary options thus allows traders to take advantage of their ability to see how forex markets are moving without worrying about the volatility and leveage that can wipe them out.  This means someone who understands the big picture and on-going trends can now profit from trading currencies.  This makes it an obvious plus, and more so for Forex traders than the less leveraged markets like commodities, stocks, or bonds.

When you take a look at the extreme difference between these markets it becomes easy to see why someone specialzing in currencies could see the obvious advantages that binaries would still offer.

Good beginning book for explaining binary options trading

Binary Options: Strategies for Directional and Volatility Trading
Amazon Price: $85.00 $44.50 Buy Now
(price as of Apr 26, 2015)
Binary options is a relatively new trading platform, and every bit of education you can give yourself with only help with any movement towards active trading. It's always important to understand as much as possible before getting started.

A few final word on binaries

Finishing up, when it comes to binary options there are a few more things you will want to know.  One is that although these have many supporters, there are also many traders who don't see binaries as being anything more than gambling under the guise of professional trading.  This means that a large number of very educated and successful financial traders simply don't like these trades in any shape or form.  Then again there are those who believe this can be an excellent method for some fundamental based traders to actually get the most out of their knowledge, skills, and ability.

Good look at technical trading analysis



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